TORONTO, Sept 5 (Reuters) - Shares of Canadian wood productcompanies rallied on Thursday as investors bet thatLouisiana-Pacific Corp's purchase of Ainsworth Lumber Co pointed at the potential for further consolidationwithin the sector.

The C$906 million ($864 million) deal, announced late onWednesday, is also likely to trim the extreme volatility for theprice of oriented strand board, widely used in home building.

The North American forest products industry, which has idledvast amounts of capacity since the U.S. housing market crashed,is notorious for mismanaging supply.

Early signs that the U.S. housing market was recoveringprompted a slew of mill restarts late last year, and OSB pricesthen fell sharply as supply outpaced demand.

The LP-Ainsworth deal expands LP's share of the NorthAmerican OSB market to roughly 30 percent. The top six OSBproducers will now control nearly 90 percent of the market, andinvestors and analysts hope this will reduce the risk of toomany players restarting too much capacity too quickly.

Deutsche Bank analyst Mark Wilde said the OSB industry couldenjoy a healthy market for a few years, if U.S. housing startsreturn to normalized levels around 1.4 million to 1.5 million.U.S. housing starts were an annualized 896,000 in July.

"However, if capacity comes back too quickly the party couldend even before it starts," he warned in a note, adding thatfurther consolidation could lead to more disciplined restorationof supply and more muted swings in OSB prices.

The LP-Ainsworth transaction sent the Thomson Reuters CanadaForest & Wood Products Index up about 4percent, with shares of rivals including Western Forest ProductsInc, Norbord Inc and Canfor Corp posting big gains.

Reid Carter, who is managing partner and head of the globaltimber group at Brookfield Asset Management, says he is cautiousabout the scope for large-scale consolidation within the space,given that the large players already have significant marketshare.

"There is some general enthusiasm following this deal," saidCarter, whose firm owns majority stakes in both Ainsworth andNorbord. "Anytime there is significant consolidation in theindustry, people hope there will be better supply discipline."

Shares of Ainsworth, the most actively traded stock on theToronto Stock Exchange on Thursday, were up 33.5 percent atC$3.93 on Thursday afternoon, while those of LP were up 11.2percent at $16.97 on the New York Stock Exchange. ($1 = 1.0485 Canadian dollars)